Wednesday, November 27, 2013

SPH REIT: Retail blue chip with just valuation (OCBC)

SPH REIT is a Singapore-based REIT established principally to invest in a portfolio of income-producing real estate used primarily for retail purposes in Asia-Pacific. The initial portfolio comprises two commercial properties in Singapore, namely Paragon, upscale retail mall and medical suite/office property, and The Clementi Mall, a mid-market suburban mall. We like SPH REIT’s exposure to the local retail landscape as the outlook is expected to remain robust, bolstered by growing retail sales, rising visitor arrivals, an expanding population and comfortable supply of retail space. In addition, the underlying growth drivers for the regional healthcare scene are expected to remain strong. Since its listing, we note that SPH REIT has enjoyed a strong run-up in unit price of 8.9%, significantly outperforming the FTSE ST REIT Index over the same period. At current price, SPH REIT is trading at 1.10x P/B, slightly higher than the local retail subsector P/B of 1.05x. Our DDM-based fair value of S$0.99 implies a total expected return of 6.4%, including a FY14F DPU yield of 5.4%. As the counter appears to be fairly priced with no visible strong near-term price catalyst, we initiate coverage on SPH REIT with a HOLD rating.

Singapore-based retail landlord
SPH REIT is a Singapore-based REIT established principally to invest in a portfolio of income-producing real estate used primarily for retail purposes in Asia-Pacific. The initial portfolio comprises two commercial properties in Singapore, namely Paragon and The Clementi Mall, with a total NLA of 898,779 sqft and appraised value of S$3.1b as at 28 Feb 2013. The Sponsor is Singapore Press Holdings, the leading media organization in Southeast Asia with a market cap of S$6.8b.

Exposure to Singapore’s retail and healthcare services sector
Through the Paragon Mall, SPH REIT has the purest exposure to the upscale retail market in Orchard Road precinct than any Singapore-listed retail REIT. In addition to Paragon Mall, Paragon also houses Paragon Medical that hosts over 60 medical and dental specialist clinics and offices. Clementi Mall, on the other hand, is a mid-market suburban retail mall that is located in the heart of Clementi town with direct access to the bus interchange and MRT station.

Industry outlook looks rosy
We like SPH REIT’s unique exposure to the upscale retail market, suburban retail space and burgeoning healthcare services sector. In our opinion, the local retail landscape is expected to remain robust, bolstered by growing retail sales, rising visitor arrivals, an expanding population and comfortable supply of retail space. We also believe Clementi Mall’s strategic location and retail offerings will make it very resilient in nature. Furthermore, the underlying growth drivers for the regional healthcare scene are expected to remain strong.

Initiate with HOLD on valuation grounds
Since its listing, we note that SPH REIT has enjoyed a strong run-up in unit price of 8.9%, significantly outperforming the FTSE ST REIT Index by 14.3ppt over the same period. At current price, SPH REIT is trading at 1.10x P/B, slightly higher than the local retail subsector P/B of 1.05x. Our DDM-based fair value of S$0.99 implies a total expected return of 6.4%, including a FY14F DPU yield of 5.4%. As the counter appears to be fairly priced with no visible strong near-term price catalyst, we initiate coverage on SPH REIT with a HOLD rating.

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